TY - JOUR
AU - Giavazzi,Francesco
AU - Pagano,Marco
TI - Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries
JF - National Bureau of Economic Research Working Paper Series
VL - No. 3372
PY - 1990
Y2 - May 1990
DO - 10.3386/w3372
UR - http://www.nber.org/papers/w3372
L1 - http://www.nber.org/papers/w3372.pdf
N1 - Author contact info:
Francesco Giavazzi
Universita' Bocconi and IGIER
Via Guglielmo Röntgen, 1
Milan 20136
ITALY
Tel: 0039-02-5836-3304
Fax: 0039-02-5836-3302
E-Mail: francesco.giavazzi@unibocconi.it
Marco Pagano
Department of Economics
University of Naples Federico II
Via Cintia, Monte S. Angelo
80126 Napoli, ITALY
Tel: +390815752508
Fax: +390815752243
E-Mail: mrpagano@tin.it
M1 - published as Francesco Giavazzi, Marco Pagano. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," in Olivier Jean Blanchard and Stanley Fischer, editors, "NBER Macroeconomics Annual 1990, Volume 5" MIT Press (1990)
AB - According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption. Only the empirical evidence can sort out which of these two contending views about fiscal policy is more appropriate -- i.e how often the contractionary effect of a fiscal consolidation prevails on its expansionary expectational effect. This paper brings new evidence to bear on this issue drawing on the European exercise in fiscal rectitude of the 1980s, and focusing, in particulars on its two most extreme cases -- Denmark and Ireland. We find that at least in the experience of these two countries the expectations' view has a serious claim to empirical relevance.
ER -